Can You Survive on Keystone in Retail Today?

It’s a dog eat dog world out there, from a retail perspective. As online sales continue to grow, and more consumers continue to move their buying online, it’s increasingly difficult for brick and mortar retailers to compete. The main reason is that web retailers have one big competitive advantage: they don’t have a store. That lack of property means overhead is lower, resulting in lower prices. As an independent retailer, you have that overhead, which means your margins are going to be squeezed, leaving precious few profit dollars after your costs.

Standard retailing metrics are built on a keystone markup mentality, marking everything up 100 percent, resulting in a 50 percent cost of sales and 50 percent that can be allocated to expenses, with any leftover becoming profit. Yet the escalating costs of operating a brick and mortar store, along with the conversion to online retailing, have thrown the notion of the keystone model into the annals of retail history. Larger retailers that manufacture their own goods (think GAP, Diesel, Guess, Pottery Barn and so many more) are operating at gross margins of seventy or eighty percent or more. That means after expenses, these companies are making a hefty profit. Compare that with your keystone gross margin of 50 percent, and you can see why it’s tough to turn a profit operating a single store. So what do you do? There are three opportunities to increase your profits:

1) Reduce Expenses. Given everything our economy has been through the past couple of years, you’ve probably already whittled your expenses down as low as they can go. Still, make sure to always take a look at costs as you review your monthly expenses.

2) Increase Sales. Since your expenses are fixed, any additional sales should result in all of those dollars going directly to your bottom line, after taking out your cost of goods. Increasing sales is a great way to increase profits.

3) Increase Your Gross Margin. Many retailers know they need to do this, but aren’t quite sure how. Ultimately, you’ll want to push toward a 60 percent gross margin in order to give yourself a little breathing room financially, and actually make some money. Here are a few tips for increasing your gross margins:

• Increase Prices. You may have competitors down the block that are carrying the same lines as you, in which case your customers will be more price conscious. You may also be carrying lines exclusively, and that’s where the opportunity to increase prices can take hold. Fifty cents here and a dollar there adds up, but you’ll be competing with people who shop online who can sometimes buy products at a considerably cheaper price, so take that into consideration when repricing.

• Don’t Apply The Same Margin to Every Product. If you’ve ever purchased a travel size product, you know you’ll pay a premium for those smaller sizes, simply because the retailer can charge more. If you conduct a cost per ounce analysis, you’ll see you pay more per ounce for a smaller size of just about any product. Make sure you’re applying the same metrics to your pricing, and charge more for smaller sizes. Consumers expect value from buying larger sizes or in bulk, but those rules don’t apply to smaller sizes, so take advantage of it.

• Hit Up Your Vendors for Better Margins. We’re still in a world where most vendors realize they need you more than you need them, and they’re willing to deal a bit more than before. So ask them what they can do to give you a better margin. Can you commit to a higher sales volume for the year, or can you commit to increasing your units purchased? Both offer potentials for a better margin. You don’t get it if you don’t ask, but if you can’t achieve the goals for a better margin, ask the vendor what other tricks they may have up their sleeve. If the brand you’re considering bringing in isn’t willing to deal, perhaps finding a different brand that can offer a better margin is the way to go, and don’t be afraid to share that thinking with vendors. This advice was adapted from a blog by Mike Kraus, Principal of StoreTouch, a retail consultancy. To see the original, go to http://tinyurl.com/443qy2k.